Strong Headwinds
Slow Economic RecoveryNew Jersey's employment picture finally brightened in July, with the private sector producing a net gain of 3,400 jobs, the first such increase this year. (See chart below.) Gains came in services and, for a change, manufacturing. The state's unemployment rate also declined, falling to 5.4% in July from 5.6% the month before.
While this uptick in employment might stir hope that the worst is over, it came against the disturbing backdrop of a weakening national economy.
Overall economic growth slowed dramatically in the second quarter, with Gross Domestic Product rising an anemic 1.1%, down from first quarter growth of 5%. Slower consumer spending and a falloff in commercial construction led the retreat. In July, employment growth slowed to a crawl and a promising manufacturing recovery faltered.
In addition, the Commerce Department reported that the 2001 recession was longer and deeper than originally thought. The downturn produced three quarters of economic decline, not just one. This put overall growth for the year at a marginal 0.3%.
The summer slowdown was so severe that the Federal Reserve Board, convinced a few weeks earlier that the recovery was on track, announced in August that economic weakness was again a greater risk than inflation. However, the Fed held short-term interest rates steady in August, keeping its benchmark bank-lending rate at a 41-year low of 1.75%.
Of particular concern to the Fed and many economists has been the spectacular failure of investor confidence inspired by the corporate accounting scandals and one of the worst bear markets in a century. The loss of trillions of dollars in stock market value over two and a half years has transformed the "irrational exuberance" of the 1990s bull market into a stubborn pessimism. Seasoned market sages like Warren Buffet have warned that stock market returns over the foreseeable future might not fare much better than they did from 1964 to 1981-a 17-year period when the Dow Jones Industrial Average notched a meager gain of one-tenth of one percent.
While most economists say a double-dip recession is unlikely, the recent data has made this a less remote prospect than in the spring, when the economy was gathering momentum.
Assuming the economy doesn't stagger back into recession, however, the 2001 recession will go on record as the second mildest in half a century.
Certainly in New Jersey, this recession has not been as severe as the 1989-92 recession, a 38-month downturn that cost the Garden State more than a quarter of a million jobs.
From July 2001, when the state's current employment decline began, through July of this year, the private sector (which excludes government payroll) lost 33,100 jobs. (See chart below.) At the nadir of the last recession, in the spring of 1990, nearly as many jobs were lost in a single month!
When the NJ Department of Labor announced that private-sector payrolls actually rose in July, hopes were stirred that the state's current employment downturn might be coming to an end. The net increase of 3,400 jobs included a rare gain of 1,000 jobs in manufacturing. Assuming the July data is not revised downward, this would be the first rise in manufacturing employment since December 2000. Significant gains came in fabricated metals (+300) as well as printing and publishing (+600).
A one-month gain, however, does not make a trend. Other indicators show the regional economy losing strength.
After making steady gains in the first half of the year, manufacturing activity in the Philadelphia region (which includes South Jersey) fell markedly in July, then tripped into negative territory in August, according to the Philadelphia Federal Reserve Bank's monthly survey. This called into doubt the durability of the fledgling manufacturing recovery, not only in the region but also in the nation.
Joel Naroff, chief economist with Commerce Bank, admitted in mid-August that his own optimism had been tempered by the Fed data. "Manufacturing is once again on the table as a question mark," Naroff said in an e-mail bulletin. "Not only are orders now slipping instead of rising, but order books are suffering from an advanced case of anorexia. And firms have started shedding workers again and are cutting back hours worked as well."
Not a pretty picture. At the other end of the state, however, the New York Fed said manufacturing activity strengthened in the New York/North Jersey region.
In spite of weakness in other industries, housing construction remained remarkably vibrant across most of the country in July and was on course to have another record-setting year. Surprisingly, business spending on new buildings and equipment, including computer technology, rose in the second quarter for the first time in two years, even as consumer spending and commercial construction slowed.
What are we to make of this confusing mix of data? While some industries remain strong or show promise of a turnaround, the economy has encountered stiff headwinds early in its recovery. Two ingredients that normally characterize the early stages of an economic expansion, fast GDP growth and a rising stock market, were missing at summer's end.
The most we can hope at this stage is that we have encountered temporary obstacles to renewed economic growth-and not a return to recession.
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Strong Headwinds 